The Bank of England (BoE) raised UK interest rates by 0.25 percentage points yesterday, and the savings market is already starting to react.
With the base rate now at 4.5%, the BoE hopes that this will help to battle inflation, which remains at an eye watering 10.1%. The aim is to get inflation down to 2%, so we still have a long way to go.
This increase also marks the 12th rise in a row and we are now facing the highest interest rates since the financial crisis in 2008. However, while mortgage holders might pay more, rising rates are normally good news for savers as interest paid out goes up as well.
A few weeks ago, we looked at the savings market to see whether savings accounts were keeping up with the base rate. Unfortunately, we found that some were still missing the mark even though some interest rates had increased by more than 400% in a year.
For example, in April the average interest rate for an easy access account was 2.22% and the maximum interest rate was 3.6%, which is much lower than the base rate.
There was more positive news for long-term saving in April, as the average for a one-year fixed-rate bond was 3.86% and the maximum interest rate was 4.72%, which comfortably exceeds the base rate.
After the latest increase from the BoE, the average monthly savings rate stands at 3.31% and the average interest rate for an instant access account is 2.42%, both of which are well below the base rate of 4.5%.
An illustration of how savings rates have changed in relation to the Bank of England base rate over the two past years. The average rates have been calculated by taking the rates from the whole of market at the time of the base rate change. Source: Defaqto and Bank of England data.
However, there are some savings accounts in the market, primarily among fixed-rate bonds, that are exceeding the base rate.
My Community Bank is currently offering a one-year fixed-term bond for 4.91% and Isbank UK via Raisin is offering a three-year fixed-term bond for 4.95%. For short-term saving, the best instant access account is from Chip and it is offering an interest rate of 3.71%.
These interest rates are inching closer to 5% and we could see further changes in the next few days as providers wait to see how their competitors react.
It’s important to note that banks are not required to increase rates on their savings accounts to match the base rate. Instead, banks focus on balancing the money they have in deposits with the amount they lend. If they need more deposits, then they might increase interest rates to entice savers.
One bank that has already made its decision is Yorkshire Building Society.
The savings provider released a statement yesterday afternoon detailing that it will automatically add 0.25 percentage points to its variable rate savings accounts.
These changes will be implemented by next Wednesday, meaning customers will benefit from the increase within a week of the BoE’s announcement. Interest on Yorkshire Building Society’s Rainy Day Saver Issue 2 will rise to 3.85% on balances up to £5,000 and its Limited Access ISA will increase to 3.6%.
This is positive news for savers, and with Yorkshire Building Society keen to support people with better interest rates, we could see more providers upping their rates to try and beat the competition.
Watch this space…
As a trained journalist, Lucinda has spent the past 10 years writing and editing content for regional and national titles, including The Mirror, WalesOnline and Manchester Evening News. She is now a personal finance editor and specialises in savings, helping people to make confident financial decisions so they can save for what matters most.